Zerohedge alerted me to this today, but I should have seen it myself because I read Bloomberg quite often.
In a world where destroying the wealth of the public through monopolizing the entire money supply and printing it so your cronies and buddies in the government can use the new supply first. Well. As somebody says. Truth is treason in the empire of lies.
What he means is that anyone not appointed by government to create money who creates money should be arrested.
Or in other words, Fischer Says Other Bankers Excluding Fischer Should Be Punished for Doing What He Does.
Beyond all the free market reforms I will spearhead as a Knesset Member, first and foremost will be a free market in money itself. Technically, the solution is extremely simple: Allow Israeli taxpayers to pay their taxes in any currency they choose, even the shekel if they choose. This would make any currency legal tender de facto, and would end the Bank of Israel’s monopoly over the shekel supply.
In order to understand why this is so necessary and exactly why it would free the economy so effectively, we need to understand how and why a monopoly on money creation by the Bank of Israel is so destructive, why it makes the middle class poorer continually, and precisely why it causes the boom/bust cycle.
Cars as an example: The Money Printer vs the Money Saver
Imagine for a moment that I want to buy a car for 100,000 shekels. I’d rather not work and save, so instead I decide to simply print 100,000 shekels in cash so Ican buy the car. I print it, I hand the money over to the car dealer, and the car is now mine.
What just happened here? I counterfeited 100,000 shekels and increased the money supply by 100,000 when I handed those shekels over to the car dealer. The average person, the kind that has to work for his money would say that I stole 100,000 shekels. But today’s economic experts like Stanley Fischer and Ben Bernanke and Paul Krugman would say that I gave “economic stimulus to the automobile industry.” So what really happened?
When an average person works in the private economy and saves money to buy a car, he produces more than he consumes, hence savings. In other words, he puts more into the economy than he takes out, the difference represented by the money he saves. There is now more value in the economy, more stuff because he worked harder, and he takes that real value represented by the money saved and buys a car for 100,000 shekels.
The car dealer now has 100,000 shekels of real value to invest in expanding his business, and thanks to the value that the saver added to the economy through saving, there is now more value in the economy with the same money supply. The value of the shekel goes up and prices drop just a little bit, and everyone owning shekels gets a bit richer thanks to the saver. The car dealer can now expand his business and safely assume the demand is there to match his increase in supply. The economy grows.
Now, if I simply print up 100,000 shekels and give it to the car dealer, I added zero value to the economy. There is no more useful stuff. Just paper. I did not save a thing. All I am doing is taking from the economy without adding anything to it. Worse, the 100,000 shekels I added to the money supply makes the value of the shekel go down a little bit, since more shekels are now chasing the same amount of goods. Prices go up. Everyone gets poorer, except for me of course, because I got to buy the car before the money supply went up. The act of me buying the car was itself the action that made the money supply go up in the first place. I, the money printer and the first new money user, am up one car. Yay for me. But everyone else besides the first person to use newly printed money loses.
Now, let’s say I stop printing money and the car dealer expands his business with the new shekels. Since everyone is now poorer, there is no new demand to match his new supply. The signal he got of new demand for his cars was wrong, because the 100,000 shekels I printed did not represent added value to the economy through saving. Demand is not there, his business overexpands and he has to cut back and contract by selling cars for cheaper and taking a loss. His business shrinks or “goes into recession”, but cars get less expensive for everyone else.
But let’s say I keep printing 100,000 shekels every day and buy another car with it day after day after day. The car dealer will keep misinterpreting the sales as new demand that doesn’t actually exist. He will keep expanding. It will look like the economy is growing and growing, the statistics the government puts out on car sales will skyrocket. But really, only I and the car dealer are benefiting. Everyone else is suffering inflation and getting poorer and poorer every time I print. At some point I will have to print more than 100,000 to buy each car since the money supply is expanding so rapidly, but that’s no big deal for me. It takes the same effort to print 150,000 as it does to print 100,000. I keep getting richer. Inflation doesn’t bother me. The car dealer keeps expanding and cars become so expensive that no one can buy them. Then let’s say suddenly I stop printing shekels and stop buying cars. The car dealer’s business totally crashes, and he goes out of business in a bankruptcy sale. All the cars get sold to the public for ultra cheap. His business “goes into depression,” but cars are suddenly cheap for everyone else.
So we see that every time money is printed:
The ones who receive it first are the ones who benefit the most
The ones who receive it first also become entirely dependent on it
The ones who receive it last suffer inflation and a rising cost of living
And we see that every time I stop printing money:
Those who were receiving it first, suffer the most
Everyone else benefits from deflation and a falling cost of living
What happens in reality?
But this is not exactly how it happens in reality. The institution in charge of printing shekels, the Bank of Israel headed by Karnit Flug, does not “stimulate the automobile industry”. No no. That’s not her job, at least not directly. When Flug expands the money supply, she buys none other than government bonds with printed money and stimulates the government. The government is always the first to get the new money.
The government then puts most of the money into the banking system, and uses a small tiny percentage of it to hire more government ministers in order to satisfy coalition partners, give raises to government workers in order to keep up with consumer prices (because God forbid a Knesset Member should suffer the ravages of inflation), cave in to unions like the Histadrut when they threaten a general strike which gives them even more power to shut the country down in future spats, and pass out more welfare to the four corners of the Earth to get more voters. So the first ones to receive new money from Fischer are:
The government and its workers
Who is the next in line? After buying votes and coalition stability with printed money, the banks then take most of the money and invest it in the stock market and mortgage loans. So the next in line are:
The stock market
The real estate market
As the real estate market rises, so do rent prices, effecting the middle class wage earner who can’t afford to buy a house and who is always last to get the new printed money. Meanwhile the government and the banks expand blissfully, and the stock market goes up, but you don’t have enough money to invest there because, with inflation and rent and food going up, you are going into debt. To the banks of course.
And so it goes, that every time the Bank of Israel prints money, the government and the banks and the land owning government-connected tycoons get richer and the middle class gets poorer. The wealth transfer from middle class to rich is a necessary part of this process. Why? Because if, for example, the Bank of Israel wants to raise the money supply by 5% and instead of giving the money to the government and the banks, it simply adds 5% to all of our bank accounts overnight, the prices of everything would go up 5% in a day or two and the Bank of Israel would have accomplished nothing but stark and immediate price inflation. The trick is to give it to one group and its buddies, being the government and the banks first. That way it takes time for inflation to affect prices and people don’t even realize they’re getting poorer, or if they do, why it’s even happening.
In order for it to work, the inflation it has to be slow and insidious so people don’t even realize what’s going on. It has to look something like this:
It has to take place over years and decades, so suddenly 50 years pass and people wonder why it now takes 2 salaries and 30 years to pay down a mortgage instead of 20 years and 1 salary, like it did 50 years ago. And then innocent people led by ignorant populists suddenly go out in the streets and protest, but they don’t know what to demand in order to fix it. Just that the government “do something,” like print money and hand it out or something.
Why is this happening? It’s because your money is losing more and more value every year while your wage grows at a slower and slower pace. You are not a government buddy, so you never get the new money first. Every time money loses value, the politically connected get richer, because they are always the first ones to get the new batch first. Government, banks, stock market, real estate.
If you want to blame someone for the cost of living going up and your paycheck staying flat, someone to blame for the rich always getting richer and the middle class always shrinking, blame paper money and the Bank of Israel, and the government for forcing you to accept its garbage money by forcing you to pay taxes with it. The Bank of Israel has destroyed savings entirely once before.
Inflation is always, always bad, because the effect is cumulative. Inflation of 1% one year does not “make up” for inflation of 4% the year before. If prices go up 4% one year while your paycheck only goes up 2%, you now have 2% less purchasing power. If the next year prices only go up 1% and your paycheck only goes up .5%, you lose another .5% purchasing power in addition to the 2% you already lost. It only gets worse. Every year. And the losses keep adding up for the middle class. You are being robbed. Every year. All the time.
Eventually the wealth transfer will become so extreme that the system will collapse. It is inevitable. Unless we act to fix it, right now.
The Solution: Competing Currencies
If taxes are payable in any currency, the Bank of Israel loses its monetary monopoly. If it prints too much, the value goes down relative to other currencies and Israelis will prefer earning those currencies instead and the bank will have to cut back on its printing or stop it entirely in order to support the shekel’s value. If Israelis can pay taxes in dollars, euros, gold, silver, bitcoin, whatever, they can then earn those currencies and they can start circulating in the Israeli economy.
Competition breeds honest money, and the middle class always gets stronger. How? Because with honest money, the money supply stays constant or increases only very slowly, but the supply of goods in the economy grows much faster, so everything gets cheaper over time.
To give you one stark example from the United States, over the last 50 years, the price of a house in dollars has risen 780%. But the price of a house measured in ounces of silver has actually dropped 64%. What about the middle class wage earner? The average wage in dollars has gone up 766%, but the amazing thing is that, in ounces of silver, or real purchasing power, the average wage has dropped a dramatic 65%. In other words, it looks like wages have increased, but there is actually 65% less purchasing power even in that increase. That’s how insidious inflation is. It looks like you’re gaining but you’re actually losing. The middle class and the poor always lose with monopoly (literally, not the game) money, but they would gain with free market money.
The way to do it so make taxes payable in any currency, thereby making any currency legal tender, and breaking the government’s monopoly on the money supply.
In response to one of my posts on the Manhigut Yehudit listserv, of which I am a frequent commentator on free market issues, one of my allies responded with the post, “Rafi Farber for Finance Minister!”
To which I responded thusly:
I don’t want the finance ministry. I want the Bank of Israel. Let me be BoI Chairman in the Feiglin administration and I know exactly what I’ll do and how. Without the Bank of Israel printing the money and creating inflation, the Finance Ministry is completely castrated, and it will have to raise taxes like crazy in order to fund all the waste and welfare, which would be impossible to do without endangering the regime itself. The government will be forced to either shrink down or risk a revolution.
Give me the Bank of Israel, and within a year I will sell almost all the dollars and the rest of the foreign exchange, buy gold and silver, hand it out to every bank in proportion to how many shekels each bank has on its books, tell them that they are now all completely on their own, close the BoI doors, fire everyone who works for me, resign, and call it a day.
Whew! Wouldn’t that be awesome. I salivate and get teary eyed just thinking about it. I’d need to hire a bodyguard.
Stanley Fischer is the head of the Bank of Israel. As such, he is the government appointed goon in charge of money printing. In his infinite wisdom, he is supposed to know exactly what the supply of money should be, because he’s purportedly a chacham she-ein kamohu – a crazy genius who has a pulsating brain and somehow knows these things. Or maybe God comes to him in his sleep and tells him how many shekels should exist and how much he should print and when.
Or maybe he’s just some guy who has no idea what he’s doing, given a power the equivalent of an economic nuclear weapon, something that no one man should ever, ever have.
Stan the Super Shekel Man recently came out with an announcement that he would be quitting his post early. Aside from the speculation as to why (I think it’s because he knows there will be an unstoppable economic tsunami in the next 3-5 years and he wants to duck out early and quit while he’s ahead), I have seen nothing but wall to wall praise for this central planning money printing soviet-style currency czar. Sure he’s kindly, has a sweet voice, an endearing Zambian accent, cutely mixes up male and female in his Hebrew grammar all the time, and the Israeli economy didn’t totally collapse in 2008 so everyone assumes the money master is responsible for saving us all from destitution. But this is all a big, sad, sorry myth.
Let’s break it down.
Let’s step aside for a moment from the persona of Stan the Man himself. He as a person is not the main problem. As I said, he’s a nice guy. The main problem is the very system of central banking that give men like him inordinate power over all of our economic lives, a power which, once you realize the scope and consequences of it, can make you dizzy.
Imagine for a moment two national economies. One where the supply of shoes and their price is controlled by one man and anybody else who manufactures or uses shoes besides him goes to jail, and another where the supply of shoes and their price is controlled by the free market, meaning a myriad of entrepreneurs freely importing and exporting shoes based on the demand for them by customers. In a free market where anyone can manufacture and buy as many or as few shoes as he wants, the supply, demand, and price of shoes will tend to reach an equilibrium point where profits will remain constant and steady. Shoe firms like wholesalers, manufactures, and retailers, will all compete with each other to sell the most shoes to the public. In order to do this, they will have to make shoes of the highest possible quality at the lowest possible prices in order to attract buyers.
If the supply of shoes gets too high, shoe prices will tend to fall, lowering profit margins, thereby restricting the amount of shoes manufactured, choking off supply, and bringing shoe prices back up to equilibrium. If demand gets too high, shoe prices will tend to rise, increasing profit margins, encouraging shoemakers to produce more in order to earn those increased profits. This brings supply back up to match demand, bringing prices back down to equilibrium again.
Now, in an economy where the supply of shoes and their price is controlled by one man, let’s call him the chairman of the Shoe Bank of Israel, we are entrusting a single person to:
Manufacture every single shoe in the country, because anyone else who does that is considered a shoe counterfeiter and goes to prison
Know automatically what the supply of shoes in the country should be at any given moment
Set the price of shoes at whatever he thinks it should be
Not abuse this power
The shoe market in such a country would be a complete mess and everyone who needs shoes would be miserable. Since only one firm would be allowed to make and sell shoes, there would be no competition and the quality of the shoes would deteriorate. If the Chairman of the Shoe Bank of Israel set the price of shoes too low, meaning he underestimates demand, people would start hoarding the shoes and buying more than they need, and there would be shoe shortages. If he sets the price of shoes too high, meaning overestimates demand, people who needed new shoes would not buy them, instead waiting for a lower price. Perhaps they would attempt to repair their old shoes, or cut open the ends if they didn’t fit. Huge surpluses of shoes would result.
Meanwhile, regardless of whether Stanley Shoemaker creates a shoe shortage or a shoe surplus in the country with his inaccurate divining of the appropriate shoe price and supply, people will have no choice but to buy shoes from him alone, and he will get richer selling them regardless of how crappy the shoes are. Nobody wants to be arrested for being a shoe counterfeiter after all.
Having one man in charge of the shoe supply in a country is bad enough. But it is infinitely worse to have one man in charge of the money supply in an entire country, because the supply and demand for money controls the entire economy, shoes included.
I know that the concept “demand for money” and “price of money” is hard to wrap your head around. Doesn’t everyone demand money all the time? How can it change? How can money itself have a price? Isn’t money money? Bear with me here.
It is difficult for people to understand these concepts these days because fiat government currencies have ruled the world since 1971, and governments the world over have taken upon themselves the exclusive right to produce money, forbidding anything else from entering the market as money. But in reality, money, just like shoes, is a good like any other. The only difference is that money is more easily tradable than shoes for other goods. In fact, money is the most easily tradable good that exists. That’s why it’s used as money.
Now, the “price of money” and the “demand for money” are reflected in many different ways. They are reflected in how much money money lenders (AKA banks) charge to borrow money, otherwise known as interest rates. If interest rates are high, then money is “expensive”. If money is expensive and money lenders can charge high interest rates, the “demand for money” must be high too. Otherwise, people would not be willing to pay such high rates in order to borrow money. If interest rates are low, then money is “cheap”. If money is cheap and money lenders are forced to lower interest rates in order to attract borrowers, then the “demand for money” must be low.
The price and demand for money is also reflected in the general economy in terms of the money prices of all other goods and services. At times when the demand for money is high, forcing interest rates up, that means people want to hold more of their money (AKA save) rather than spend it. If people want to save more money, the consequence is that the money-prices of goods and services will go down. Things will get cheaper to buy, because in order to attract sales, merchants will have to lower prices in order to entice more money out of savings.
The high interest rates, or high price of money, will in turn serve to bring the money market back into equilibrium at times when the demand for money is high and prices low, as money-savers (lenders) will earn higher rates of return. This will earn savers more money on their savings, and in that way they will be enticed to spend the money they earned from their saving, bringing prices back up, money out of savings, and interest rates back down as lenders are forced to settle for lower interest rates in order to attract more borrowers again. The demand for money is thus lowered, enabling merchants to raise the money-prices of other goods and services, prices go up, demand for money down, and interest rates down.
A short recap:
Demand for money up = interest rates up = prices down
Demand for money down = interest rates down = prices up
Eventually, this entire process reaches an equilibrium point where relative prices of goods and services in terms of money will stay more or less stable along with interest rates.
Now what about the supply of money? This is the cool part. In a free market, the supply of money will be controlled NOT by Stan the Shekel Man, but by gold and silver mining companies teaming up with private money coiners who in turn team up with private banks. Here’s how it works:
Mining Company A has mined 100 kilos of silver, but needs them coined by a recognized and respected money coiner so he can buy stuff. Merchants don’t accept uncoined blobs of silver because there is no way to tell how pure the silver is. So he goes to Money Coiner B and gives him 100 kilos of silver.
Money Coiner B puts the silver through his coining machine, checks its purity, and stamps it with his stamp of approval by coining it into little circles with his certification on it. He keeps 2 kilos of newly minted silver coins as a commission for his services.
Mining Company A and Money Coiner B then go to Money Bank C and say, “Do me a favor Money Bank C. We have these coins here. They’re too heavy. Could you please put them in your vault and give us paper receipts that the silver is sitting here? Please give the silver to whoever presents you with the receipt.” Money Bank C takes the silver coins, provides them with receipts, and charges Mining Company A and Money Coiner B a small fee for storing the coins and providing the receipts.
All parties go out and spend the paper receipts, AKA “money” in the economy and buy stuff.
How is the supply of money regulated in a free market? In the following way: When the demand for money goes up and the prices of other goods go down, mining companies will make higher profits on the gold and silver that they mine for two reasons:
Since the prices of everything are going down, it will become cheaper for them to do the mining itself, increasing profit margins.
Since the prices of everything are going down, the mining companies will be able to buy more stuff with the gold and silver they produce.
These two factors will entice them to increase production of gold and silver, increasing the supply, bringing interest rates down and prices of other goods and services back up. When prices of other goods and services go back up, it will cost the mining companies more money to mine gold and silver, and they will be able to buy less with the gold and silver they mine. Eventually, profit margins for the gold and silver they mine will go down to a point where they will be forced to lower production. The supply of money will go down and the prices of goods and services back down again with it.
In a free market for money, the best, most efficient, and most honest money coiners will get the most business and have the most coins circulating on the market. Those coining companies that cheat and lie about the purity of their coins will lose business and go bankrupt. Their coins will not circulate, or they will circulate at a discount.
In a free market for money, the best, most efficient, and most honest money receipt issuers (currency printers, private banks) will store the most money and issue the most currency. Those private banks that cheat and lie about how much silver or gold they have in their vaults to match the receipts and “inflate” their currency will lose business, inspire their receipt holders to call in their receipts for silver and if they can’t provide it, they will go bankrupt. Their currency will not circulate, or it will circulate at a discount..
In a free market for money, you will have several different competing currencies and coinages, with people accepting the ones with the best reputations and rejecting the ones that are unreliable.
Interest rates and prices will remain stable as money supply and money demand equilibrate, and as in any developed economy, goods and services will increase faster than the supply of money, allowing for a gently falling price level and everyone to get richer in real terms.
Or you can have someone like Stan the Shekel Man Fischer in charge, printing sheets of paper backed by absolutely nothing, causing prices to continually rise and government controlled money to continually lose value, making everyone poorer and more miserable.
Stanley Fischer did not save the Israeli economy from collapse. He simply did not abuse the insane power given to him as badly as other central bankers did: the monopoly power to print money. This power, incidentally, was given to him in much the same way as our fictional Stan Shoemaker’s was given to him: By a bully State ready and willing to arrest anyone besides Stan who manufactures shoes. Or in this case, money. And why would the Israeli government forbid anyone but Stan their goon from manufacturing money? Because when you have control over the entire money supply, you can spend it on anything…you…want. Like welfare. And leather seats for Knesset members. And armored cars for party heads. And first class trips to France for Defense Ministers. And subsidies to ignoramuses who you want to vote for you. And huge campaign posters and TV ads and God only knows what else.
When one man controls the shoe market, the quality of shoes goes down and everyone who wears shoes, suffers. When one man controls the money market, the quality of money goes down. It loses value. It makes you poorer. Everyone who uses money, suffers.
Every single time Stanley Fischer printed shekels with the flip of a switch, he stole from people like you and me who have to work to earn our shekels. He stole from you. He stole from me.
Stanley Fischer is a thief who should be arrested. He is not a hero who should be praised.